It’s not just the adjuster and insurance companies that risk managers need to work with on complex insurance claims. Sometimes, coordinating internal efforts can be just as challenging.
Different business units may be involved when complex claims occur. And, surely, other corporate functions — possibly including operations, supply chain, legal, HR, facilities and finance, to name a few — will be part of the process of gathering information, analyzing the loss and determining how the company recovers.
The C-suite, obviously, takes an interest as well.
“There are a lot of people involved outside of risk management when you are dealing with a complex claim,” said Julie Young, director, business risk management and insurance, Dell.
“It will take a long time to get it settled. It’s not an easy deal. My goal is to always set internal expectations in a realistic way. It’s important to make sure everyone is aware and everyone is on board with the overall strategy.
“It’s always important to be extremely proactive about everything, to try to anticipate and get ahead of things,” she said. “It can be difficult, especially when you are talking about a big claim. It definitely is a challenge.”
According to The Claro Group, a consultancy that advocates on behalf of policyholders, it’s important for risk managers to treat claims like a capital project.
“Large-loss insurance claims should be viewed as any other major project with an uncertain outcome. Claims should be managed to achieve the highest return possible, within the context of the business’ strategic needs,” according to a statement on the company’s website.
“If there is a significant gap between the economic loss and the recovery, you start to see some questioning and finger-pointing [within the policyholder’s company],” said an expert on insurance settlements.
“Some CEOs and COOs don’t necessarily have a grasp of how insurance … is structured. They think if you had a loss, you should recover 100 percent. They don’t appreciate the nuances,” he said.
That is why communication is crucial to managing the internal aspects of an insurance claim, experts said.
“It is important as a risk professional on the policyholder side,” said Allen Melton, partner and leader, insurance and federal claims services practice, Ernest & Young, “to make sure from day one you are communicating effectively across the organization about not only the impact of a loss but the claims process, what that looks like, what that entails, the length of time it takes, and the volume of documentation required to satisfy insurers and consultants.
“It’s an iterative process that is very fluid. Risk managers do themselves a disservice by not educating the organization on what to expect, if the company doesn’t have a prior history [of filing and settling insurance claims].
“It is important for the risk professional to educate the C-suite on the insurance claims process, especially if the organization does not have much experience with large or complex losses, so that officials can properly anticipate the impact of the loss on the company’s P&L as well as educate externally should questions arise,” Melton said.
Be clear on objectives
When risk managers and their internal stakeholders initially discuss the claim, they need to decide exactly what it is they want from their insurers.
Some companies want to maximize the amount of cash they receive, others want to resolve the claim as quickly as possible. Some companies prioritize the relationship they have with the insurance company; others focus more on the potential premium rate increases that may follow.
“You have to make sure everyone on the team understands what is going on and what the ultimate objective is,” said Ty Childress, partner, Jones Day.
The policyholder should have one person be the primary point of contact with the insurance adjuster and its counsel, and it must present a unified front, he said. Often, coverage counsel is best suited for that role.
“You don’t want to have a claims strategy targeted to objective X and halfway through decide you want to pursue objective Y instead,” he said.
Once the company decides on its objective, it must decide who is “the one empowered within the company to make the call [on a proposed settlement]. For a complex claim, where multiple stakeholders in the company have to engage as part of the internal process, the most effective policyholders are the ones that line up both the team and the objective early.
“It’s more efficient when everybody knows their role in the process and what the game plan is,” Childress said.
But agreeing to a settlement doesn’t always resolve the internal challenges.
Distributing the payout within the business when liability coverage is involved can create internal strife, said Karen Libertiny Ludden of Maddin, Hauser, Wartell, Roth & Heller PC.
“It often manifests as a reluctance to accept the insurer’s decision to settle a claim because it looks like an acceptance of fault, even when there is an explicit denial of fault and a confidentiality agreement in the release.
“Moreover, since many companies follow the practice that any loss, even when covered by insurance, needs to be attributed to someone in the corporate structure, it can create an obstruction in the settlement effort that could work against the best global interest of the company,” she said.
Another problem is when more than one business unit is impacted by the same event.
In one case, a claim involved a company plant that manufactured bricks for two different business units within the company, said Robert Reeves, partner, assurance services at Ernst & Young. One business unit dealt with bricks used in building construction, while the other dealt with faux bricks used for facades.
After the company agreed to a settlement with its insurers, an internal argument broke out because part of the compensation for each business unit’s CFO was based on how their respective units did. The way the claim payout was allocated would impact the units’ financial statements — and their compensation, Reeves said.
“The results were good for the company overall,” he said. “We were not thinking about the impact of how it would be allocated.”
Another potential conflict of interest can occur when risk managers are compensated partly on the company’s cost of insurance or the cost to transfer risk, he said.
When a claim is filed, the CFO “wants to make sure they get everything they are due under the insurance policy. Risk managers may be more concerned about the long-term relationship with the carriers and making sure premiums don’t go up,” Reeves said.
Depending on the situation, a risk manager could take just the opposite view. In a liability case, for example, a risk manager may feel strongly that a settlement should be rejected because of strong defenses while legal may have an alternative reason to push for settlement, said Dan Marshall, chief claims officer U.S., Aon Risk Solutions.
“Everybody has a different perspective,” he said.
CFOs focus on the financial perspective while risk managers focus on the risk implications, he said. Legal may either want to strongly pursue the case or settle it as quickly as possible. Others in the C-suite may be more concerned about brand reputation or the impact of a drawn-out claim on the company’s operations.
It’s incumbent on the risk manager, who has the most experience with claims, to set “realistic expectations, not just in settlement of the claim but in the timing of the settlement of the claim,” said Dell’s Young.
“I think communication is extremely important, but the level and timing of it ought to be up to the risk manager,” she said. “It’s your job, your need to manage this.”
John Dempsey, managing director and global practice leader, claims preparation, advocacy and valuation practice, Aon Global Risk Consulting, said that setting expectations with the adjuster and insurance company is equally important to a positive outcome.
Providing an accurate, detailed preliminary loss estimate to the adjuster not only sets the company’s internal expectations, but the adjuster will use it when recommending a reserve to the carriers.
“If the ultimate claim comes in plus or minus 5 percent, you will have a much better chance of having an all-in settlement in an appropriate amount of time,” he said. “The insurance company doesn’t want any big surprises down the road.”
While internal tensions do arise following a major loss, they generally do not rise to the level of derailing a settlement.
“I rarely see internal disputes about the merits of a particular settlement. … It’s more often an internal discussion regarding how will we allocate the proceeds later?” Childress aid.
“Have I encountered situations where before I get final approval of a settlement there are internal discussions about internal distributions? Sure,” he said. “But it won’t hold up the settlement. It should never interfere with a good claim result with an insurer because the policyholder cannot reach internal resolution about the allocation of the proceeds.
“That’s why you need internal leadership on the policyholder side — to say we will get this done and worry about that later.” &